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As a loyal customer, you want the companies you do business with to treat you right. But many mutual fund companies have been taking advantage of their loyal customers for years by charging them costs that are designed not to benefit them but rather to help fund managers seek their next profitable source of additional assets.

For years, investors have tried to get rid of 12b-1 fees. Now, the Securities and Exchange Commission once again has the 12b-1 fee in its sights, and this time, it's more important than ever to get these fees into the forefront and force the financial industry to make it absolutely clear where your hard-earned money goes.

Understanding 12b-1 feesThe irony in the SEC's examination of 12b-1 fees is that it's an SEC rule that authorized them in the first place. The rule lets mutual funds charge an ongoing annual fee to cover a wide range of expenses, ranging from sales commissions to advisors who sell fund shares to investors to advertising costs, the production of promotional materials, and other marketing and distribution costs. Some funds charge 1% per year in 12b-1 fees, although many limit the fee to 0.25% in order to retain the right to claim "no-load" mutual fund status.

A quarter-percent doesn't sound like a big deal. But according to TheWall Street Journal, 12b-1 fees cost investors $9.5 billion in 2009 -- and with the stock market having been in the dumps during the first part of that year, depressing the base on which that quarter-percent is calculated, you can expect that figure to be on the rise this year.

Who's winning from the fee?Clearly, the fund companies that charge the fee are the direct beneficiaries of the 12b-1 fee. Goldman Sachs (NYSE: GS) , Morgan Stanley (NYSE: MS) , and Wells Fargo (NYSE: WFC) reap 12b-1 fee revenue from at least some of their funds, and to the extent that they would have had to pay those sales and marketing-related expenses anyway, the 12b-1 fee simply falls to their bottom lines as profit.

But there are other companies that benefit from the ability of fund companies to charge 12b-1 fees. For instance, discount brokers Charles Schwab (NYSE: SCHW) , TD AMERITRADE (Nasdaq: AMTD) , and E*TRADE Financial (Nasdaq: ETFC) generally charge a commission to buy mutual funds. But all of them offer their customers certain mutual funds at no transaction fee. If you look closely, you'll notice that in many cases, those no-transaction fee funds come with 12b-1 fees -- and some of those 12b-1 fees help the fund companies pay brokers for listing their funds with no commission. So in other words, part of your fund fees are going to these brokers -- even if you don't use them to buy your fund shares.

Being fairThere's absolutely nothing wrong with fund companies wanting to pay salespeople to sell their funds. (Whether it's OK for the salespeople to sell funds whose fund companies pay them is another question entirely -- but that's not the issue here.) But here, it's the way fund companies want their customers to shoulder the burden that's the problem.

For one thing, the fee forces everyone to pay for services that only some fund shareholders take advantage of. If you buy shares directly from a fund company, why should you pay a fee that would otherwise go to a financial advisor? If you buy shares from an advisor who works for the same company that manages the fund, why should money to compensate that advisor come from the fund -- making it seem as if the advice you received was somehow "free"? And if you don't use a discount broker's fund supermarket to buy your shares, why should you subsidize those shareholders who do?

The more important consideration is more subtle. The 12b-1 fees are a convenient way for fund companies to collect fee revenue in a way that many investors don't understand. A reference in a prospectus to an obscure SEC rule number is tailor-made to confuse the average shareholder. If a fund company thinks it's reasonable to charge every shareholder for marketing and sales expenses, it should at least reveal where all that money is going -- and what if anything you can do to avoid the fee.

Fight for your rightsWhether you think 12b-1 fees are bilking investors or a fair way to compensate financial professionals, the SEC needs your opinion. It's easy to do so -- just click here between now and Nov. 5 and let your voice be heard. And let us know what you think in the comments below.

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Comments from our Foolish Readers

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I don't understand the big deal with 12b-1 fees that you have been harping on. All you have to do to avoid paying the fee is buy funds that don't charge them. Of course if you don't read the prospectus of a fund before buying that is your problem.

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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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